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Understanding finances essential

Running a business requires many skills, such as marketing, management and purchasing, to name a few. All of these are important but in my opinion, the most critical of all is finance.

Finance is the information machine that allows you to see so much about your business very quickly. Truthfully, entrepreneurs who do not delve very deeply into their finances really inhibit their business’ growth and risk its financial health as well.

I can get a quick handle on an entrepreneur’s knowledge when I ask them what their total assets and total liabilities are. It never ceases to shock me the number of entrepreneurs who do not know these two numbers, which are so critical.

So why is finance so important? Just about every decision you make has a financial consequence. If you are buying a product, you have to consider your cash flow both in terms of how you will pay for it and what price you can charge for it. Additionally, if you need to obtain financing, you will have to understand how the interest rate will affect the income statement and how the principle repayment will impact both the balance sheet and cash flow.

Your finances also help you determine how much the services you provide are costing you. If you are providing a service, you must know whether or not you are making money on each job. If you are not, then you will need to either increase prices or reduce costs. Even in the case that you are making money on each job, you will need to continue monitoring future jobs to ensure necessary adjustments are made down the road.

Many entrepreneurs say they do not need to understand finance or financial statements because they have an accountant. However, unfortunately, most accountants are not going to take the time to guide you through day-to-day or month-to-month financial decisions. There is no escaping it, you must know and understand your financial statements.

In my opinion, many entrepreneurs are just intimidated by the numbers the same way they would be a foreign language, because it really is like a foreign language to them. However, there is so much help available.

When I typed ”understanding finance” into Google, I got more than 7 million hits. Obviously there is a ton of information out there. Though, if it was that easy to go on the web and glean the information you need, everyone would be experts. Understanding financial statements really requires much more than that.

In order to really grasp financials, entrepreneurs need to attend a seminar or have someone review their statements with them more than once and explain how each item relates to their business. When I give these seminars, entrepreneurs always come up to me afterward and say they never knew financial statements contained that much information.

Now go out and make a commitment to learning your financial statements. It is vital that you understand both their meaning and their impact on your business.

Jerome S. Osteryoung, director of outreach services at the Jim Moran Institute in the College of Business at the Florida State University, can be reached at (850) 294-7478.